Inheritance Tax, Business Property Relief and AIM shares

In Inheritance Tax – Mitigation using Business Property Relief – I introduced both Business Property Relief (BPR) and the concept of this being available to non-entrepreneurs. In this article, I will begin to explore the use of a portfolio of shares listed on the Alternative Investment Market (AIM), which, on the stepladder from the smallest business to the largest in the UK, is the highest point at which BPR continues to apply.

 

What is AIM?

The AIM, which is owned and operated by the London Stock Exchange, is not a recognised stock exchange, meaning that shares quoted on AIM are potentially eligible for BPR.   AIM is the most successful growth market in the world. Since its launch in 1995, over 3,000 companies from across the globe have chosen to join AIM. Powering the companies of tomorrow, AIM continues to help smaller and growing companies raise the capital they need for expansion.  A wide range of businesses, including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital.

AIM Risks

With the the market catering for early stage and venture capital companies , there is an assumption that AIM investment is extraordinarily high risk.  All forms of investment carry some degree of risk and whilst I don’t want to understate the risk of investing in shares listed on the AIM, I will argue that the step-up from investing in shares quoted on the London Stock Exchange is not that great, if fundamental investing principles are followed.

If I was contemplating investing in a portfolio of shares quoted on the London Stock Exchange, I would carry-out some fundamental research, including an analysis for each company of:

  • The financial statements, looking in particular at income, expenses, profitability, investment in research & development, payment of dividends, assets, borrowing, etc.
  • The management of the company, in particular, strength in depth, track-record, style, industrial relations, share ownership, etc.
  • Competition and market place, including competitors, competitive edge, barriers to entry & expansion, market conditions, etc.
  • The way each prospective component complemented the others to provide a balanced, structured and diversified portfolio.

Approaching AIM investment in the same methodical manner will exclude from my portfolio start-up companies and those that own a hole in the ground, beneath which may be the next big mineral find!  However, it will lead to the inclusion of some of the many companies listed on the AIM that are well-established with a good, long track-record.  For example, Young & Co’s Brewery PLC can trace its history back to 1581 and for many years was quoted on the London Stock Exchange, de-listing to the AIM so that family members owning shares could benefit from BPR. Of course, this is not a recommendation to invest, it is just an illustration of the calibre of company that can be found amongst those listed on AIM.

In the light of the BPR rules, AIM investment for IHT mitigation requires a further element of research to ensure the company qualifies for BPR by being a trading entity rather than an investment entity.  It is also important to realise that this can change, so it is essential that the Investment Manager is in direct contact with the company to closely monitor its activities and that it remains a trading entity.

The following chart, supplied by Canaccord Genuity Wealth Management, helps to graphically illustrate the points I am making regarding risk, comparing as it does a carefully researched and managed portfolio of some 20+ AIM shares, the FTSE All-Share Index and the FTSE AIM Index.

Effectively, what we are looking at here are three Investors, one of whom invested in the Canaccord Genuity Wealth Management IHT Portfolio; one of whom invested in a FTSE All-Share Index Tracker and one who invested in a FTSE AIM Index Tracker, all on the same day in April 2006.

Compared to their starting point, following the collapse of Lehman Bros in September 2008, the IHT Portfolio and the FTSE All-Share tracker had fallen by a similar amount – some 40% – whilst the FTSE AIM Index Tracker fell by some 70%.  The FTSE AIM Index tracker was still in negative territory in June 2014, whereas both the FTSE All-Share and IHT Portfolio had been back in positive territory for some time.  The IHT Portfolio re-established its earlier peak after about 5-years, with the FTSE All-Share Tracker taking a little longer.  Of course, past performance is no guide to the future.  Also, I must emphasise that the use of the figures from Canaccord Genuity Wealth Management is as an example only and should not be construed as a recommendation for their IHT Portfolio.  There is a plethora of Investment Managers offering an AIM/IHT portfolio service, which services should be researched thoroughly before selecting one provider.

An Investor in any Stockmarket-based Fund or portfolio has to accept a considerable degree of investment risk.  The post-Lehman collapse was, hopefully, exceptional, but even in normal market conditions the shorter-term downside risk could easily be -30% or more.  Investment in the AIM does carry a higher degree of risk, but, as my above comments show, not as high as some people may believe.

If you are already investing in the Stockmarket, then the step-up in risk profile is not that great, but, if you hold all your savings in cash, it is a huge step up the risk ladder; perhaps a step too far.  Whilst the potential IHT benefits are significant, it is important to remember the key adage, “Never let the tax tail wag the investment dog”.  In other words, don’t invest in something you either don’t understand or are uncomfortable with just because it saves tax.

AIM and Tax

On the subject of tax, in addition to the IHT benefits of investing in the AIM – full (40%) relief after just 2-years – there are two other tax benefits.  Firstly, from 15 August 2013, AIM shares were brought into the list of authorised investments for Individual Savings Accounts (ISAs), meaning that income and gains can be sheltered from personal taxation.  Secondly, from 28 April 2014, AIM shares were exempted from Stamp Duty and Stamp Duty Reserve Tax, saving 0.50% on the dealing costs, compared to dealing in shares on the main market.

Who is IHT Mitigation via the AIM suitable for?

This is the $64,000 question!

The issues to consider are:

  • Can you live with the risk entailed with AIM investing?
  • Can you live with the volatility – regular, and sometimes dramatic, movements, both up and down, in share prices?
  • Do you need to establish an IHT saving sooner than the 7-years generally required for more traditional planning?
  • Do you want to retain access to your capital and the income from it, because gifting is inappropriate?
  • Are you acting as an Attorney for someone?  If so, you have very limited powers of gifting and certainly cannot set-up Trusts, so this may be one of the few routes open to you.  Having said that, my advice would would be for the Attorney(s) to make an application to the Court of Protection for permission to proceed with such a scheme.

In the final analysis, this is something upon which you should take professional advice.  When I am advising Clients in this area, I always:

  • Consider the more traditional routes for IHT mitigation first.
  • Discuss risk and volatility in great detail to ensure my Client thoroughly understands what they are getting into.
  • Question whether there is likely to be a time-frame of 3 – 5+ years, rather than just the 2-year qualifying period, to allow for investment volatility.
  • Consider some of the specialist BPR products as an alternative.
  • Only recommend AIM investment when it is clearly suitable and then only as a part of an overall IHT planning strategy.
  • Recommend the appropriate AIM Investment Manager, after robust due diligence, and then monitor the ongoing service provided.

What’s next?

If you think you have an IHT issue and you want to consider ways of mitigating the impact this will have on your family’s future inheritance, contact me today using the form below.




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About Clive Barwell

Clive Barwell is one of the most experienced and qualified financial planners working in the later life market today, he specialises in advice and guidance for the over 55s. To ask Clive a question, please email him at info@clivebarwell.co.uk. Alternatively, you can follow Clive on Twitter, connect with Clive on LinkedIn or see Clive's profile on Google+.